Legal advice makes sense when considering a severance package

By Tony Poland, LegalMatters Staff • Severance packages come in different forms so it only makes sense to explore all your options before signing away your rights, says Toronto employment lawyer Ellen Low.

Whether you are an employee being presented with a package or an employer considering a termination, seeking legal advice can lead to a more informed and financially beneficial choice, says Low, principal of Ellen Low & Co. 

“Everyone wants a deal. The employer does not want to overpay and employees want a fair settlement for their years of service,” she tells LegalMattersCanada.ca. “It is essential to examine the offer as a whole, considering all the ramifications to determine if it makes sense.”

Low says there are several ways an employer can provide a severance package to an employee, starting with working notice. In this scenario, a worker will be told that at the end of the notice period, they will no longer be employed. Until that time, they are expected to come to work each day and will be paid their normal salary and benefits.

May be able to negotiate the duration of the notice period

“Employees tend to dislike it, especially if they are provided with a long notice period,” she says. “An employee may be able to negotiate with respect to the duration of the working notice period, especially where there is a question about the appropriate length. 

“Absent that, it is perfectly permissible as long as during the period of working notice the employee continues on with the same terms and conditions of their employment at the time of termination,” Low adds. “For instance, the employer cannot tell you that you are terminated and have to work for the next six months but in a position far below your job description.”

During the period of working notice, the employee has the right to look for and secure alternative work, she says. 

“There are some instances where the employee secures a position with another company and they are still entitled to their severance pay under the Employment Standards Act (ESA),” Low says. “In these cases, the employee should consult with an experienced employment lawyer before actually tendering a notice of resignation during a period of working notice to ensure they are receiving all they are entitled to.”

She says in her experience, working notice has “become increasingly rare.”

‘Probably not beneficial to keep a terminated employee around’

“That is because employees today are likely to have access to all sorts of confidential information within an organization. There can be a security and confidentiality risk,” says Low. “And quite frankly, it is probably not beneficial to keep a terminated employee around. They are not necessarily going to do the best work knowing that they have just been fired.

The more common working notice structure is what is known as a “garden leave,” she says.

“It is a British term. What it means is rather than actually having to go to work every day as you would during a period of working notice, the employee stays home,” Low explains. “Everything you would be entitled to continues as though you were employed. You focus on your job search efforts instead. It gives you the financial security of knowing that you continue to receive all your employee benefits and compensation during the agreed-upon period of time.” 

The most sought-after termination package is the lump-sum payment, she says.

Consider tax ramifications of lump sum payment

“You get a one-time payment and off you go. In the right circumstances, lump sum can be great, but I caution my employee clients to examine this option very carefully before deciding whether they really want a lump-sum payment. Part of the reason for that is the tax ramifications,” says Low. “Where there is a one-time lump-sum payment, a portion of that payment will immediately be remitted to the Canada Revenue Agency and that may leave the employee with less money overall.”

• Air Canada ruling raises interesting ‘specific performance’ question
• Employers should pay heed to court ruling on overtime
• Ontario proposes rules for employers who watch workers

As well, with a one-time lump-sum payment there is a natural discount to the employer of up to 20 to 25 per cent because there is a possibility that the employee will be able to find another job during the notice period, she says.

“So, for example, if it is agreed that the notice period ought to be 12 months and you are receiving a lump sum package, you should reasonably anticipate that the payment should be for about 10 months because there is the expectation you will find new employment within that time,” says Low. 

The employer wants to ensure they don’t overpay

She says an employer naturally wants to ensure that they are not overpaying a terminated worker, which is why an employee needs to carefully consider the package before accepting it.

Any severance package, such as a garden leave, may include salary continuance, but it is not necessarily guaranteed, says Low.

“What I am seeing in many cases these days is salary continuance but with an obligation to mitigate,” she says. “If the employee is able to secure alternative employment, the payments will end but there will be some sort of stipend or incentive paid out. 

“Using a 12-month notice period as an example, your employer will expect you to try to find another position in the next year. If you do, you are obliged to tell your former company who may then give you a portion of any remaining payments,” Low adds. “That can be a pretty good compromise in terms of making sure that the employer does not overpay. Those terms probably need to be negotiated through legal counsel to provide both the employer and employee with some reasonable degree of certainty about the obligations to report when another position is found.”

Employment law can be complicated

As an employment lawyer, Low says when she takes a case, she will examine any existing employment contract to ensure it meets ESA and common-law provisions. She notes employment law can be complicated and what is permissible can be unclear.

“I would encourage anybody who has been terminated to have their packages reviewed, not necessarily just for compliance with the Employment Standards Act or the contract, but also to look at the manner in which the employer proposes to provide that notice,” says Low. “You may have received a great package, but if all of the payments are subject to mitigation you could find another job the very next day and you have to forfeit your severance. Then, perhaps, it is not such a great deal after all.

“For the employer who is debating terminating a worker, it would be worth having a conversation with an employment lawyer to structure the package in such a way that it’s compliant with the employment contract but where they don’t end up overpaying.”